What occurs when both the price level and real GDP rise simultaneously?

When both the price level and real GDP rise simultaneously, it typically indicates that aggregate demand has increased. An increase in aggregate demand shifts the aggregate demand curve to the right, resulting in higher prices and higher output (real GDP) as businesses respond to increased demand for goods and services.

This process occurs in the short run, where firms may increase production to meet the heightened demand, leading to a rise in real GDP. The increased consumer spending, government expenditures, or investment activities can cause this shift in aggregate demand. Consequently, as more goods and services are demanded, the available resources may become more fully utilized, leading to upward pressure on prices as competition for those resources heightens.

In contrast, a decrease in short-run aggregate supply would mean the opposite situation—lower output and higher prices due to increased production costs or reduced supply—while a consistent level of short-run aggregate supply does not support the simultaneous increase in both price levels and GDP. Therefore, the rise in both indicators points directly to an increase in aggregate demand.